- The USD/CAD attracts buyers for the second consecutive day, although the bullish potential seems limited.
- A modest USD rebound from a minimum of several months is considered to provide some support to the pair.
- Any significant advance of the USD, however, seems elusive before the crucial FOMC decision.
It is observed that the USD/CAD is being built on the rebound last night from the 1,4260 area, or a minimum of almost two weeks, and winning some positive traction for the second consecutive day on Wednesday. Cash prices rise again above 1,4300 level during the Asian session, although the bullish potential seems limited since operators could choose to wait for the result of the highly anticipated policy meeting of the FOMC.
The market consensus strongly suggests that the Federal Reserve (FED) will maintain the federal funds rate without changes in the current range of 4.25% to 4.50%. Therefore, the attention will focus on the updated economic projections and the press conference after the meeting, where the comments of the president of the Fed, Jerome Powell, will be examined in search of clues about the future path of feat cuts. This, in turn, will play a key role in the influence of American dollar prices (USD) and will provide significant impulse to the USD/CAD.
Looking ahead to the risk of the Central Bank, some repositioning movements help USD recover slightly from its lowest level since October reached Tuesday. Apart from this, the prices of crude oil, after the late recoil of the previous day from a maximum of more than two weeks, weakens the Loonie linked to raw materials and support the USD/CAD pair. However, the risk of a greater climb of tensions in the Middle East, which could affect the supply, helps to limit the fall of the black liquid.
In addition, a surprising increase in the annual inflation rate of Canada, to 2.6% in February or the highest in eight months, could stop the operators of opening aggressive bearish bets around the Canadian dollar (CAD) and limit the USD/CAD pair. However, the fact that cash prices are kept comfortably above the single mobile average (SMA) of 100 days justify a certain caution before positioning themselves for an extension of the recent drop of the pair observed during the last week approximately.
Canadian dollar faqs
The key factors that determine the contribution of the Canadian dollar (CAD) are the level of interest rates set by the Bank of Canada (BOC), the price of oil, the main export product of Canada, the health of its economy, inflation and commercial balance, which is the difference between the value of Canadian exports and that of its imports. Other factors are market confidence, that is, if investors bet on riskier assets (Risk-on) or seek safe assets (Risk-Off), being the positive risk-on CAD. As its largest commercial partner, the health of the US economy is also a key factor that influences the Canadian dollar.
The Canada Bank (BOC) exerts a significant influence on the Canadian dollar by setting the level of interest rates that banks can provide with each other. This influences the level of interest rates for everyone. The main objective of the BOC is to maintain inflation between 1% and 3% by adjusting interest rates to the loss. Relatively high interest rates are usually positive for CAD. The Bank of Canada can also use quantitative relaxation and hardening to influence credit conditions, being the first refusal for CAD and the second positive for CAD.
The price of oil is a key factor that influences the value of the Canadian dollar. Oil is the largest export in Canada, so the price of oil tends to have an immediate impact on the value of the CAD. Generally, if the price of oil rises, the CAD also rises, since the aggregate demand of the currency increases. The opposite occurs if the price of oil drops. The highest prices of oil also tend to give rise to a greater probability of a positive commercial balance, which also supports the CAD.
Although traditionally it has always been considered that inflation is a negative factor for a currency, since it reduces the value of money, the opposite has actually happened in modern times, with the relaxation of cross -border capital controls. Higher inflation usually leads to central banks to raise interest rates, which attracts more capital of world investors who are looking for a lucrative place to save their money. This increases the demand for the local currency, which in the case of Canada is the Canadian dollar.
The published macroeconomic data measure the health of the economy and can have an impact on the Canadian dollar. Indicators such as GDP, manufacturing and services PMIs, employment and consumer confidence surveys can influence the CAD direction. A strong economy is good for the Canadian dollar. Not only attracts more foreign investment, but it can encourage the Bank of Canada to raise interest rates, which translates into a stronger currency. However, if the economic data is weak, the CAD is likely to fall.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
